Saturday, 4 February 2017

Donald Trump and The Dodd-Frank Act: The Destruction of a 9-Year 'Quiet Period'

It was reported yesterday
(3/2/2017) in the Guardian Newspaper that the newly-elected U.S. President,
Donald Trump, had ‘moved to roll back the financial regulations brought in
after the last financial crisis’[1]. Those regulations came in
the form of the sweeping Dodd-Frank Wall
St. Reform and Consumer Protection Act 2010, and whilst the President’s
orders do not signal the repeal of the Act (only Congress can repeal the Act),
the order does represent an alarming sentiment.

The campaign of Donald Trump was
defined by sensationalist rhetoric, on both sides of the U.S. political divide,
so it is wise not to contribute to that. However, the report yesterday contains
two extremely worrying elements that must be considered; the severity of both
can be understood when we look at the development after the last great collapse
of the U.S. economy – the Great Depression. After the Great Depression of the
1930s, the U.S. Administration of Roosevelt initiated the ‘New-Deal Era’ which
one scholar argues brought about 70 years of financial balance – also known as
the ‘Quiet Period’[2];
whilst the New-Deal era policies can be debated as to their motives or
ambitions, the fact that there was no widespread crash before the
deregulatory-era of the 1990s brought about the Financial Crisis of 2007/08 supports
this notion of ‘properly designed bank regulations can prevent financial crises
for a significant period of time’[3]. So, with that in mind,
two elements from yesterday’s report are striking.

Firstly, whilst the President’s
Press Secretary, Sean Spicer, argues that ‘we desperately need to overhaul how
we approach financial regulation… [Dodd-Frank was a] disastrous policy’, it is
in fact the President’s own remarks that reveal the underlying nature of this
regulatory approach: ‘We expect to be cutting a lot out of Dodd-Frank, because frankly I have so many people,
friends of mine, that have nice businesses that can’t borrow money’. Gary
Cohn, Director of the National Economic Council, and formerly the Chief
Operating Officer at Goldman Sachs, went further by suggesting that the
executive order was ‘a table-setter for a bunch of stuff that is coming’. Yet,
as we strive to be critical, but fair, it is important to note that whilst
Dodd-Frank was needed, it was not perfect[4]. There are a number of
elements that can be argued as being over-burdensome or too wide-ranging (I
have been critical, for example, of the Dodd-Frank Act’s approach to Credit
Rating Agency regulation). Yet, whilst this may lessen the scorn for President
Trump’s recent acts, there is another, slightly more downplayed element of the
3rd of February report that throws this understanding into
considerable doubt.

Even though the report continues by
stating that the Trump Administration will seek to end the so-called ‘Volcker-Rule’,
which is concerned with placing systemic firewalls between a bank’s consumer
and risk-taking endeavours (the amalgamation of which is called ‘Universal
Banking’), that is not the most concerning development. The most concerning
development is the reported targeting of the Consumer Financial Protection
Bureau, which has proven to be an effective Watchdog and has reportedly
returned over $11 billion to victims of financial crime and malfeasance,
leading one director of a lobbying group for financial reform to proclaim that
this move, in particular, is a ‘stunning betrayal of what Trump promised, and
that was to protect us from standing up to Wall Street’ – herein lies the rub. Donald
Trump’s sensational victory in the U.S. Presidential Election will live long in
the memory. Yet, it is feared that it will not be the sensational element that
lives long, but the damage that he causes. Whilst I will not pass comment on
the roles of Republican or Democratic Administrations, understanding who is in
Trump’s Administration will reveal one truth above all else: who the
Administration is designed to serve.

In terms of the Administration’s financially-concerned
position alone, the list is revealing. Steven Mnuchin is the Treasury Secretary
and a former Goldman Sachs Executive. Wilbur Ross is the Commerce Secretary and
has ties to the New York Investment House N.M. Rothschild & Sons and the
infamous investor Carl Icahn, who himself has been appointed as a ‘Special
Advisor on Regulatory Reform’. In fact, President Trump’s Executive Order was
borne out of a meeting with JPMorgan Chase’s Jamie Dimon and BlackRock’s Larry
Fink, further emphasising the connections between Trump and big business[5]. But this connection
between the White House and Wall Street is nothing new – President Obama’s
Treasury Secretary was Citigroup’s Jack Lew, for example. What is of concern is
the timing of President Trump’s
actions.

The last ‘quiet-period’ was
preserved for over 70 years until the deregulatory phase of the 1990s, backed
by the infiltration of Government by self-interested Financial officials, took
hold. Then, one of the most socially-destructive financial collapses sent the
globe into a tail-spin. Now, just 9 years after an event that sent suicides,
ill-health and general depravation soaring, President Trump believes that we
are ready to move on. It took 70 years for society to be able to withstand the
attack of self-interested greed emanating from the privileged few, and even
then we are still suffering – there is no way that society is ready for another
onslaught after just 9 years. President Trump’s rhetoric should be of concern,
and the actions taken to benefit the privileged at the direct cost of the
public should be fought against with great endeavour. Whilst the issues of
civil liberty dominate headlines, it is the deregulatory rhetoric, so close to
the last financial crisis, that arguably represents the greatest danger to
modern society.

[4]
For an excellent discussion on the inadequacies of the Dodd-Frank Act see
Edward J. Kane ‘Missing Elements in US Financial Reform: A Kübler-Ross Interpretation of the Inadequacy
of the Dodd-Frank Act’ [2012] 36 Journal of Banking & Finance.

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Contributions are welcome to this blog. If you would like to contribute regarding any area of financial regulation, then please feel free to email me and submit your blog entry. The content should be concerned with financial regulation, and why it matters, but this is broadly defined. The blog is open to all who are professionally concerned with financial regulation, which may range from an Undergraduate Student interested in writing on the subject, to Professors and industry participants.